For monetary policy to be effective in changing planned investment spending,
A)interest rates must not be responsive to changes in the money supply
B)interest rates must be sensitive to changes in Gross Domestic Product
C)investment must be sensitive to changes in interest rates
D)investment must be sensitive to changes in the spending multiplier
E)the spending multiplier must be stable

Question

Quizplus · Accepted Answer

Monetary policy works by changing interest rates, which in turn affects borrowing costs for businesses and individuals. Thus, for monetary policy to be effective in changing planned investment spending, investment must be sensitive to changes in interest rates. This means that when interest rates are lowered, businesses and individuals should be incentivized to borrow and invest more, while higher interest rates should discourage investment.

For Monetary Policy to Be Effective in Changing Planned Investment